November 19, 2003

By David Kamin, Joel Friedman, and Richard Kogan

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Congress is this week considering an energy bill that features a new round of substantial tax cuts.  Months of haggling have produced a bill that includes tax breaks totaling $26 billion through 2013 as estimated by the Joint Committee on Taxation and the Congressional Budget Office.[1] This is more than three times the tax cuts in the energy plan originally proposed by the President, and larger than the separate energy bills passed by the House and Senate earlier this year.  Further, nearly half of the bill’s tax breaks are scheduled to expire before 2013; if these provisions are extended, the bill would cost about twice as much as advertised.  Because none of the energy bill’s tax cuts are offset, the measure adds to deficits — which are estimated to be $5 trillion over the next decade, according to projections by a range of analysts — exacerbating the nation’s long-term fiscal problems.

To gather votes, Congressional leaders have heaped on the tax breaks benefiting a wide variety of special interests, ranging from ceiling fan suppliers to the nuclear power plant industry.  Even the normally tax-cut friendly editorial page of the Wall Street Journal found the bill to be objectionable, noting that “We realize that making legislation is never pretty, but this exercise is uglier than most.”[2]  In general, the type of targeted tax breaks that permeate this measure either reward businesses and individuals for actions they would have undertaken anyway or distort investment decisions by drawing funds into activities that are, in the absence of the tax break, less profitable and thus less beneficial for the economy as a whole.  While these costly tax cuts offer questionable benefits for the nation’s energy security, they unquestionably add to the deficit, something the nation can ill afford.


Rising Deficits and Low Revenues — No Time for More Tax Breaks

The fiscal picture has sharply deteriorated over the last two years.  Projections have gone from showing a stream of healthy surpluses to deficits “as far as the eye can see.”  Meanwhile, tax revenues have fallen to their lowest level relative to the economy in the last four decades.

Energy Bill Exceeds Budget Resolution, Allowing Points of Order in the Senate

The Congressional budget resolution adopted in April 2003 permits $1.7 trillion in tax cuts and entitlement increases between 2004 and 2013.  This reflected a $400 billion Medicare prescription drug benefit and an ambitious tax-cutting agenda that includes making permanent all of the tax cuts enacted 2001 that expire in 2010.  These tax-cut and entitlement spending limits are enforced in the Senate in 2004 as well as over multi-year periods.  If a piece of legislation causes any of these limits to be breached, the measure is subject to a point of order in the Senate under its pay-as-you-go rule.  Although that rule offers little in the way of long-term fiscal restraint, it nonetheless comes into play for purposes of considering the energy conference agreement.  The cost of the tax-cut package enacted in May as well as several smaller measures enacted since then are (using official estimates) below the multi-year limits, but they have used up the available room in 2004.  As a result, the energy bill — which reduces revenues by $2.5 billion in 2004 and increases spending by $0.7 billion in that year — is in violation of the Senate’s pay-as-you-go limit for 2004.  In addition, the energy bill is subject to other budget points of order because it violates the tax-cut limit for the Finance Committee in 2004 as well as the spending allocation for the Energy and Natural Resources Committee in 2004 and for the multi-year periods covered by the budget resolution.  If raised by a Senator, these various points of order can only be waived with 60 votes.

Passage of the energy bill would add to the deficit.  Despite a steady stream of ever-worsening budget news over the past few months, no attempt was made to impose any semblance of fiscal discipline on the bill; instead, Congressional leaders made the bill more expensive than the versions proposed by the President or initially passed by the House and Senate.  The first step to addressing the nation’s fiscal problems is to “stop digging the hole deeper.” This legislation goes in the wrong direction.

End Notes:

[1] Joint Committee on Taxation, JCX-101-03, November 18, 2003. Congressional Budget Office, Estimated Impact of the Conference Agreement for H.R. 6, November 18, 2003.

[2] “The Grassley Rainforest Act,” Wall Street Journal, November 18, 2003, p. A20.

[3] Center on Budget and Policy Priorities, Committee for Economic Development, and Concord Coalition, Mid-term and Long-term Deficit Projections, September, 29, 2003.